Factbox: Major U.S. financial regulation reform proposals

The bill is likely to win final approval this week. If approved, it would have to be merged with a measure backed by the U.S. House of Representatives in December. Further changes could be made to the bill at that time.

Once a final version is hammered out it would go to Obama, who would likely promptly sign it into law. That could happen by mid-year, according to analysts.

Here are snapshots of the Senate bill's key elements, how they compare to the House bill, and winners and losers:

Preventing More Bailouts

* Objective: Squash the idea that some financial firms are so central to the economy that they are "too big to fail." The aim is to avoid a repeat of 2008, when the Bush administration signed off on costly taxpayer bailouts of firms such as AIG (AIG.N), but caused a panic by refusing to bail out Lehman Brothers, whose bankruptcy froze capital markets worldwide.

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up an "orderly liquidation" process that would allow authorities to seize large firms in distress.

Senate Democrats dropped a proposal to establish a $50 billion liquidation fund, opting instead to fund the cost of such operations from asset sales and, in case of shortfalls, fees on other large firms.

* House-Senate dynamic: The House bill would set up a somewhat simpler liquidation process that includes a $200 billion prepaid fund.

* Winners and losers: If the new strategy works, the economy is better protected from financial sector crises. Big financial firms could take a hit from paying fees.

Protecting Consumers

* Objective: Stop abusive home mortgages, credit cards.

The Senate bill would create a consumer protection bureau to regulate such products.

State authorities would be able to enforce new rules issued by the watchdog but could not cross state lines to charge nationally regulated banks. Federal authorities would still be able to overrule state laws under certain conditions.

House-Senate dynamic: The House bill calls for an independent consumer protection agency, while the Senate bill puts it in the Federal Reserve to appease Republicans.

The House bill exempts many businesses from the watchdog's oversight. The Senate bill has fewer outright exemptions. A fight is under way on whether to exempt auto dealers.

Winners and losers: Consumers can expect ber protections. Credit card firms and mortgage lenders face tougher rules, regardless of where the watchdog is set up.

Volcker Rule

* Objective: Ban risky trading unrelated to customers' needs at deposit-insured banks whose federal backing enables them to borrow money more cheaply than rivals.

Obama proposed this ban on "proprietary trading" in January along with his adviser, former Federal Reserve chairman Paul Volcker. It may become law, but probably not as written.

Under the Senate bill, the "Volcker rule" would be adopted, but regulators would write its details.

Democratic Senators Jeff Merkley and Carl Levin are offering an amendment that would ensure regulators don't water down the rule later. Their proposal would bar banks from high-risk speculative trading, require large nonbank financial institutions to set aside more capital for speculative activity, and prohibit financial firms from betting against their customers. Republicans have prevented the Merkley-Levin amendment from coming up for a vote.

* House-Senate dynamic: The Volcker rule is not in the House bill.

* Winners and losers: Too soon to say. Volcker says his rule would avert the next financial crisis. Large firms could lose profits if the rule is enacted. But the Senate bill, as written, falls well short of making that a certainty.

Over-the-Counter Derivatives

* Objective: Police the $615-trillion over-the-counter derivatives market, which was a hothouse for risk during the boom years and greatly amplified the financial crisis.

The Senate bill proposes new rules that would push as much OTC derivatives traffic as possible through exchanges, electronic platforms and clearinghouses, in order to boost transparency, risk comprehension and price competition.

A hard-hitting proposal from Senate Agriculture Committee Chairman Blanche Lincoln would require banks to separate their swap-trading units. Banks and regulators oppose her proposal. Analysts say it may be dropped from the bill.

Senate Banking Committee Chairman Christopher Dodd has proposed a compromise that would suspend any application of Lincoln's measure for two years and allow regulators to kill it altogether after studying it. Some critics have said Dodd's approach would cloud markets with uncertainty for two years.

* House-Senate dynamic: The two bills are similar but the House exempts a wider range of end users from central clearing. There is no Lincoln proposal equivalent in the House bill.

* Winners and losers: Wall Street mega-firms -- Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N) -- dominate the OTC derivatives market. The substantial profits they reap from it could be sharply reduced.

Systemic Risk

* Objective: Create a new entity to spot and head off the next crisis. The Senate bill sets up a nine-member council of regulators, chaired by the Treasury secretary.

* House-Senate dynamic: The House bill proposes a council chaired by the Treasury but gives the Fed a bigger role.

* Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket.

Policing Banks

* Objective: Rationalize the jigsaw-puzzle bank supervision system to stop problems from festering in the cracks.

The Senate bill keeps oversight of large bank holding companies with assets over $50 billion at the Fed. The Fed would also continue to oversee state banks with under $50 billion in assets.

* House-Senate dynamic: Few differences remain now between the Senate bill and the House bill, which preserves the Fed's and FDIC's bank supervision roles. Both bills call for closing the Office of Thrift Supervision.

* Winners and losers: OTS will close.

[Source: Reuters, Washington, 20May10]

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